Friday, December 18, 2015

Third Avenue

A large mutual fund specializing in risky, high-yielding bonds has blocked investors from getting their money back, citing difficult trading conditions for its securities.

This unusual move by Third Avenue Management funds, which manages $8 billion in customer assets, highlights a long-standing fear among regulators and economists that too many investors have piled into risky areas of the bond market, like junk bonds, leveraged loans, and emerging-market debt.

As funds in these areas have grown in size, the ability of portfolio managers to buy and sell these securities in a reasonable amount of time has been curtailed as investment banks have stopped making a market in these areas because of regulatory constraints.

This is what apparently happened to Third Avenue’s Focused Credit Fund, which not long ago was about $2.5 billion and recently shrank to $788 million as investors rushed to redeem shares because of weakness in the junk bond market.

With no sign selling pressures were abating, Third Avenue has decided to stop fulfilling investor sell orders and liquidate the fund.

In a statement explaining the decision, Third Avenue’s chief executive, David M. Barse, said requests for redemptions, with a “general reduction of liquidity in the fixed-income markets” made it impracticable to “create sufficient cash to pay anticipated redemptions without resorting to sales at prices that would unfairly disadvantage the remaining shareholders.”

According to the company, the remaining assets in the fund will be put into a liquidating trust and sold off gradually, the idea being to not drive down prices too sharply. This process could last more than a year, which means current investors in the fund may have to wait at least that long to get their money back.If they get it back. Market mu$t be protected at all co$ts.

The interest rates on junk bonds, riskier bonds that companies with higher debt sell to yield-hungry investors, have spiked in the past month with concerns that a slowing economy would push many of the firms into default.

Moody’s Investors Service, the credit rating agency, expects corporate defaults to reach 3.8 percent next year from 2.8 percent this year. While that may not seem like much, it is the upward trend that worries investors, and the fact so much of investor money has poured into these funds since central banks began aggressively purchasing fixed-income assets in 2009.

“This confirms many of the fears we have had about high levels of corporate debt and the lack of liquidity in the marketplace,” said Hung Tran, a senior executive at the Institute of International Finance, which has been warning about this issue. “It should also be seen as a powerful motivation for mutual funds to review their liquidity management strategies.”

What is surprising about the fund’s failure, analysts say, is that it had not taken more precautions to have cash on hand in case this type of situation arose. Of late, many funds investing in these less-than-liquid niches of the market have increased cash levels and even taken out credit lines from banks in order to be prepared for a selling wave.

Third Avenue, which usually focuses on value stocks, seems to have been caught short in this way.

"Third Avenue Management is parting ways with CEO David M. Barse after he announced plans last week to freeze redemptions in its troubled high-yield mutual fund, The Wall Street Journal reported, citing unidentified people. Barse was let go and isn’t allowed in the building, the newspaper said, citing a security guard at the firm’s headquarters. Third Avenue declined to comment when. Barse did not respond to messages left at his home. Third Avenue rattled credit markets after telling investors Dec. 9 that its Focused Credit Fund was halting redemptions and would conduct an orderly liquidation of assets. Such measures are rare among mutual funds, which are required to provide investors with liquidity on a daily basis. Focused Credit Fund had $788.5 million in assets at the time the shutdown was announced, down from $3.5 billion in June 2014. Shares of money managers, including Affiliated Managers Group, which owns part of Third Avenue, slid after last week’s announcement. Barse had overseen Third Avenue since 1991."Also see:

NEW YORK — Years before its distressed bond fund blew up, Third Avenue Management lost its mojo.

The firm founded in 1986 by Martin Whitman has been shedding assets since before the 2008 financial crisis, hurt by poor performance and an exodus of managers. Two of Third Avenue’s four remaining funds trail 98 percent of peers over the last five years. The firm’s assets, which reached $26 billion in 2006, sunk to $8 billion at the end of November.

The money manager has also been bleeding talent since Whitman turned over his flagship Third Avenue Value Fund in 2012 to Ian Lapey after it lost 21 percent the prior year. Lapey left along with more than a dozen managers and analysts in the last three years, adding to concerns about the firm’s risk management and oversight. Chief executive David Barse departed this week after shutting down the Focused Credit Fund.That is a polite way of putting it.

“It is not a given they will regain their stature,” said Lawrence Glazer, managing partner at Mayflower Advisors, where he helps oversee $2 billion. “They are going to need a better story to tell before people will trust them with their money again.”Meaning you never can again, not in the$e times.

Daniel Gagnier, a spokesman for Third Avenue at Sard Verbinnen & Co., declined to comment on the company’s performance.

Meanwhile, Third Avenue received approval from US regulators to temporarily suspend redemptions from its $788.5 million high-yield bond fund.

The New York-based management firm will be required to put in place investor and market protections for its Third Avenue Focused Credit Fund, and be subject to ongoing oversight by the Securities and Exchange Commission, as a condition of the approval, a spokeswoman for the regulator said in a statement.

Third Avenue’s defunct $788.5 million Focused Credit Fund held positions in a range of struggling companies. The firm took the rare step of freezing withdrawals, which triggered a selloff in high-yield bonds and stock markets as fears grew that a collapse in the speculative-grade market could cause a global contagion.Thus the government helping to manage the liquidation. Can't undercut the house of cards.

Whitman, 91, began investing in distressed companies in the 1970s. His Third Avenue Value Fund, created in 1990, gained an average of 12 percent a year over its first 20 years, compared with an annual increase of about 5 percent for the MSCI World Index. Assets topped $11 billion in 2007, according to data compiled by Bloomberg.

Since 2007, the fund has had a few rough years. After Whitman and then Lapey managed Third Avenue Value, Robert “Chip” Rewey III took over on June 10, 2014.

With Rewey at the helm, it has lost 9.6 percent compared with a loss of 1.6 percent for the MSCI World Index. The value fund is down 8.7 percent this year and assets have plunged to $1.7 billion by Nov. 30.

The other funds aren’t doing much better. The $179 million Third Avenue International Value Fund is down 15 percent this year and has trailed 98 percent of peers over five years, according to data compiled by Bloomberg. The $395 million Small-Cap Value Fund lost 6.1 percent this year and is trailing 62 percent of peers over five years.

Third Avenue’s biggest fund, the $3.4 billion Real Estate Value Fund, is up 9.1 percent annually in the last five years, though it’s down 4.4 percent for 2015.

“The old school style of value investing Third Avenue is known for has been out of favor,” said Steven Roge, a portfolio manager at R.W. Roge & Co., which oversees more than $200 million for clients. “It hasn’t worked very well for most of the past decade.”

In 2014, managers on the Third Avenue International Value Fund and the Third Avenue Small-Cap Value Fund left the firm, said Leo Acheson, an analyst at Morningstar Inc. Third Avenue has lost 15 members of its investment team since early 2013, he said in an interview.

Third Avenue’s “poor risk management and oversight, leadership changes, and continued turnover,” explain why all of the firm’s funds are being placed under review for a possible downgrade of their ratings, Acheson said in a note on Monday.

Whitman, who in 2002 sold a majority stake in his firm to Affiliated Managers Group Inc., remains the chairman of Third Avenue. A management committee now runs the firm after Barse’s exit.

“There’s a concern that Third Avenue was all about Marty Whitman and that they haven’t been able to make the transition to new leadership,” said Glazer of Mayflower Advisors.

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